Client Alert

Treasury Suggests Limiting Definition of Digital Asset Broker

09 Mar 2022

Recent correspondence between a group of U.S. Senators and the Department of the Treasury appears to have eased the significant concerns expressed by the digital asset sector regarding the scope of the new broker reporting legislation included in the recently passed Infrastructure Investment and Jobs Act (IIJA). The IIJA amended sections 6045 and 6045A of the Internal Revenue Code, which impose information reporting requirements on brokers and certain other persons that facilitate transactions involving “covered securities.”

These amendments expand the definition of covered securities to include “digital assets” and the definition of broker to include “[a]ny person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”[1] For these purposes, “digital assets” are defined as “[a]ny digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary,”[2] which would include digital asset securities (as that term has been used by the SEC staff) as well as any cryptocurrency, utility tokens, and non-fungible tokens (NFTs), among other digital assets.

As amended by the IIJA, the Internal Revenue Code now generally requires any person who regularly facilitates transfers of digital assets to report basic information about each transaction, including the name and address of the parties and details regarding the transaction’s gross proceeds. This requirement currently applies whether or not the digital asset is actually transferred to, or within the control of, the person or persons acting as brokers within the new definition.

Unsurprisingly, the breadth of the new reporting requirement alarmed the relatively nascent digital asset sector. That alarm was not without reason. To see the potential scope of the new legislation, consider the following example:

Person X, using the cryptocurrency ETH (the native token of the Ethereum blockchain), purchases on OpenSea.io a NFT created by Person Y. Person X transfers ETH to OpenSea.io from her digital wallet, powered by MetaMask software. Person X and Person Y directly interface only with OpenSea; however, the transaction involves multiple other intermediaries: the community that runs and maintains the Ethereum protocol, the miner who validates the transaction and causes it to be stored on the Ethereum blockchain, and the creator of the digital wallet software, MetaMask, which stores the private keys controlling Person X’s ETH. Moreover, several of these parties receive a transaction fee for facilitating the transaction.

New section 6045 on its face could bring the community maintaining the Ethereum protocol, the miner, and the software provider of the digital wallet into the definition of “broker,” potentially subjecting each of these parties to information reporting requirements. The problem is that the nature of the functions provided by several of these parties do not generally allow them to obtain the information required to be reported by section 6045. Although some of these parties interact directly with Person X or Person Y, others–e.g., the miner and the community maintaining the protocol–do not interact with either Person.

Recognizing these concerns, Sens. Patrick J. Toomey (R-Pa.), Ron Wyden (D-Ore.), and Cynthia M. Lummis (R-Wyo.) proposed an amendment to the IIJA prior to its passage that would have excluded miners, sellers of hot and cold wallets, and blockchain protocol developers from the definition of “broker.” However, this amendment was ultimately rejected.

Correspondence between the Senate and Treasury

On December 14, 2021, a group of U.S. Senators issued a joint letter to Treasury Secretary Janet Yellen urging Treasury to provide informal assurance (and, eventually, formal regulatory guidance) that the IIJA’s amendments to sections 6045 and 6045A would be interpreted to prevent the undesirable result described above. Recently, on February 11, 2022, Treasury responded with its own letter, stating that “ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by the reporting requirements for brokers.” As an example of an ancillary party not captured by the IIJA’s amendments, Treasury offered “persons who are just validating transactions” (i.e., miners) and “persons who merely write software code” (e.g., MetaMask). This informal guidance may dispel some of the uncertainty generated in the digital asset sector by the IIJA.

Further, Treasury’s letter confirmed that it will “consider the extent to which other parties in the digital asset market, such as centralized exchanges and those often described as decentralized exchanges and peer-to-peer exchanges” (e.g., OpenSea) should “be treated as brokers” for purposes of 6045 and 6045A. Treasury pointed to existing section 6045 regulations which impose broker reporting obligations on “market participants” whose activities grant “access to information about sales of securities by taxpayers” as opposed to participants such as miners or software providers who do not have such access.

Interestingly, in support of the position outlined in its letter, Treasury referred to a “colloquy” between Sens. Rob Portman (R-Ohio) and Mark Warner (D-Va.) conducted on the Senate floor in August 2021, when the IIJA was still being considered. A colloquy is a scripted conversation between members of Congress that is entered into the congressional record, becoming part of a bill’s legislative history. Colloquies can serve to give context when the black letter of a bill is open to broad interpretation.[3] A colloquy may provide a persuasive indication of a bill’s legislative intent, which regulators may draw upon when promulgating guidance.[4]

Notwithstanding this informal guidance and insight into the intent of the lawmakers, the digital asset sector continues to push for a formal amendment to or regulations clarifying the narrower definition of digital asset broker in section 6045 to dispel any confusion and to better prepare for future regulatory guidance on the rapidly developing digital asset industry.


[1] Section 6045(c)(1)(D).

[2] Section 6045(g)(3)(D).

[3] The IIJA was passed under the Senate’s budget reconciliation rules, which generally may only be used to pass laws related to spending or raising revenue. To avoid adding language into a bill that might disqualify it from passing through budget reconciliation, the Senate may express its intent for a bill in a colloquy rather than in the bill’s actual language.

[4] For example, Sens. Keating and Ervin participated in a colloquy in April 1964 to build the legislative history regarding the Civil Rights Act of 1964. 88 Cong. Rec. S6717 (1964).

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